SANUWAVE Health, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; filed November 8, 2016. Financial statements are unaudited.
Business context and regulatory status
SANUWAVE develops noninvasive acoustic pressure shock-wave technology. Revenue came primarily from sales of orthoPACE devices and accessories in Europe, Canada, Asia and Asia/Pacific; the company did not market commercial products in the United States. Its lead U.S. candidate, dermaPACE for diabetic foot ulcers, had no U.S. marketing approval as of the filing. The company submitted a de novo petition to the FDA on July 23, 2016, seeking Class II classification; management said approval might be possible in late 2016 or early 2017.
Key financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $255,652 | $143,605 | $728,382 | $594,040 |
| Gross profit | $156,974 | $104,853 | $478,535 | $420,691 |
| Gross margin | 61% | 73% | 66% | 71% |
| Operating expenses | $990,579 | $1,425,428 | $3,020,780 | $3,874,930 |
| Operating loss | $(833,605) | $(1,320,575) | $(2,542,245) | $(3,454,239) |
| Net loss | $(1,139,810) | $(1,026,844) | $(3,986,509) | $(3,707,492) |
| Basic and diluted loss per share | $(0.01) | $(0.02) | $(0.04) | $(0.06) |
Revenue increased 78% in Q3 and 23% year to date, mainly from more orthoPACE device and applicator sales. Gross margin fell as a greater proportion of lower-margin device and applicator sales affected the mix. Operating expenses declined, led by lower R&D costs after clinical enrollment ended and lower administrative costs. Net loss nevertheless increased year over year in both periods, mainly due to warrant valuation losses and higher interest expense. The nine-month 2016 warrant valuation loss was $812,983.
Cash, liquidity and debt
- Cash and cash equivalents were $504,404 at September 30, 2016, versus $152,930 at December 31, 2015. Current assets were $1.036 million and current liabilities were $1.392 million, a working-capital deficit of approximately $356,000.
- For the first nine months, operating cash use was $2.709 million, investing cash use was $6,878, and financing provided $3.072 million. Financing included net proceeds of $1.597 million from the 2016 equity offering and $1.528 million from a private placement.
- Related-party notes payable totaled $5.357 million, net of discount. The notes bear 8% interest, are secured by a first security interest in company assets, and are due January 31, 2018. The company also reported $147,300 of current warrant liability.
- Management estimated fourth-quarter operating cash use of $175,000–$225,000 per month and said additional capital was required during Q4 2016. Management warned that financing could significantly dilute shareholders and that failure to raise funds could force a bankruptcy filing. The financial statements assume continuation as a going concern and include no adjustments for a failure to continue.
Outlook, risks and unusual items
- Management expected operating losses to continue for the next few years while pursuing regulatory approval and commercialization of dermaPACE; it said successful approval and commercialization could help offset losses, but gave no revenue or earnings guidance.
- The first dermaPACE Phase III study did not achieve statistical significance for its primary 12-week endpoint, although reported wound-closure results were statistically significant at 20 and 24 weeks. In the supplemental study, the 12-week monitoring success criterion was not met, and enrollment stopped. Management said the FDA would review the totality of safety and efficacy evidence.
- The company’s financing and share count changed substantially. It issued equity in public and private offerings, exchanged most Series A warrants for common and preferred shares, and had 78.7 million warrants outstanding at September 30, 2016. Common shares outstanding were 136.7 million at that date and 137.1 million on November 4, 2016. Further financing or warrant exercises may cause substantial dilution.
- Federal net operating loss carryforwards were approximately $70.1 million, but the company maintained a full valuation allowance on deferred tax assets; future ownership changes could limit use of those carryforwards.
- Management said ordinary-course litigation was not expected to have a material adverse effect. Disclosure controls were deemed effective; the filing also describes a previously reported material weakness concerning accounting for complex financial instruments and a control added to engage outside expertise as needed.
Important facts for investors to verify
- FDA’s response and timing for the dermaPACE de novo petition, including how the agency weighs the initial and supplemental trial results.
- Whether SANUWAVE secured the additional Q4 2016 capital management said was necessary, and the financing terms and resulting dilution.
- Cash burn, cash availability and any changes to the going-concern assessment.
- Debt terms, security interests, warrant liabilities, and the potential dilution from outstanding warrants and other convertible securities.
- Whether device sales and gross margins support a sustainable increase in revenue, and the company’s progress toward U.S. commercialization if FDA authorization is obtained.